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IMF Aids Cyprus Bailout

Written By Brian Hicks

Posted April 4, 2013

The International Monetary Fund has stated that it will provide Cyprus with $1.3 billion in an effort to help that nation get back on a stable economic footing, restore stability to its national banks, and generally bring down public spending.

The announcement was made yesterday, and the deal was worked out with other Eurozone authorities back on March 25, reports Bloomberg. However, it also comes with fairly demanding terms.

Cyprus will have to, generally speaking, restructure the nation’s two biggest banks, in addition to executing mandatory budget cuts and reworking its wage and pension structure.

From the New York Times:

“This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement issued by the fund, which is based in Washington.

The IMF’s own contribution is just about 10 percent of the comprehensive Cyprus package; the remainder, some $11.6 billion, is due from sixteen other nations within the Eurozone, who have yet to sign off on the deal.

cyprus bailout protestThe whole package was finalized after discussions between Cyprus, the European Central Bank, and the European Commission. Just last month, Cyprus finally agreed to make drastic changes to its banking sector in moves that resulted in large losses to bondholders and other major investors in the nation’s two largest banks: Cyprus Popular Bank PCL and Bank of Cyprus PCL.

But Cypriot officials projected the new IMF deal in a good light. From the New York Times:

“This is an important development which brings a long period of uncertainty to an end,” Christos Stylianides, a government spokesman, said in a statement made available on Wednesday.

The deal comes at a crucial time for Cyprus. Just before the deal was announced, the nation was in a critical position, with a further 3.5 percent shrinkage in the national economy projected for this year. Unemployment could go as high as 14 percent.

But with the strict terms of the deal, those numbers could easily worsen, with the economy shrinking by more than 5 percent and unemployment consequently worsening.

The euro showed some gains against the U.S. dollar following the IMF’s announcement. In Brussels, the euro was trading at $1.2840 at 2:43PM yesterday, up 0.2 percent, while rising 0.1 percent through the day against the yen.

Cyprus has been working to drag itself out of trouble. The nation’s president just swore in a new finance minister, while the government made various moves designed to reflect its intent on austerity.

The Wall Street Journal reports that the Cypriot government has decided to limit first-class travel for senior officials, while banks can more readily seize homes. As well, Easter bonuses for pensioners are out.

Altogether, Cyprus has stated that it will go for spending cuts and increases in taxation to total more than a tenth of the national economy ($21.8 billion annual) all the way through 2018.

Cyprus has also decided to raise the retirement age, reduce healthcare spending, and plans on raising a further $1.79 billion over the next half-decade through privatizations.

All of this comes after two prior attempts to help Cyprus. Over the course of the Eurozone crisis, which is now in its third year, Cyprus Popular’s depositors were forced to face losses of up to 80 percent of their holdings exceeding the guaranteed limit (roughly $128,000). Similarly, Bank of Cyprus investors faced losses of up to 60 percent of uninsured amounts.

Moreover, the capital controls Cyprus imposed are going into their second week; this has had a very negative impact on the nation’s reputation as an offshore financial haven.

Among the measures Cyprus has adopted or intends to adopt are tax increases equaling 2 percent of the national GDP and spending cuts equaling 4.5 percent of the GDP by 2018. Moreover, Cyprus is implementing further cuts intended to lead to savings of about 5 percent of the GDP through 2015.

Meanwhile, the corporate tax rate is projected to remain among Europe’s lowest—likely in hopes that businesses will continue to favor Cyprus due to the lenient taxes. However, given the recent moves among Cypriot banks and the increases in withholding tax, investors are less likely to continue flocking to the nation. 


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